A Trade Policy Is Overdue

The battle between the free-traders and the protectionists is generating an extraordinary amount of sound and fury, considering that both sides are defending a myth.

The trouble is that the myths hide the real world. Both Congress and the White House are arguing about the wrong thing. As a result, the United States is as far as ever from a rational trade policy that might reduce our record $150 billion trade deficit and enable U.S. industry to compete in a new and baffling world.

There is no such thing as pure free trade, and never has been, despite President Reagan`s restatement of this credo earlier this week and his promise to punish violators of the free-trade canon. As free trade does not exist, neither does its ideological opposite, pure protectionism.

Consider: At least half the trade in the world is affected, one way or the other, by some sort of ``protectionism``--by tariffs, quotas, subsidies or other measures that distort trade by preventing its free flow. These measures grow daily. Free-traders say this should choke off trade and impoverish us all. Yet trade grew by 9 percent last year and will grow by another 4 to 5 percent this year.

Consider: With the spread of multinational companies, fully 40 percent of the world`s trade is not between countries but between branches of companies. In other words, trade flows, not between a German manufacturer and an American buyer, but among the various arms of the same company, often American-owned

Consider: American manufacturers compete less these days against factories in Europe or even Japan, where wage scales are roughly similar to ours, than against factories (often American-owned) in Third World countries, where wages are one-tenth what an American worker makes. No amount of wage-cutting here can match these Third World salaries. Nor should it. The entire U.S. economy is based on substantial income for workers.

Consider: Almost every nation except the United States has a trade policy, and makes it part of its overall foreign policy. They all realized long ago that trade is vital to their livelihood. In these countries, government policies on taxes, industry and investment are shaped to promote trade and to expand industries and jobs. The official American line, that these rational policies are somehow evil, strikes the rest of the world as nutty.

Against these realities, President Reagan`s faith in free trade--his belief that all will be well if trade is only allowed to flow freely, with no government interference at all--is touching but silly.

His congressional opponents, frustrated by the President`s blind faith in this economic tooth fairy, have responded with blunt instruments, such as a blanket 25 percent tariff, as though all imports are equal and all countries deserve the same treatment.

The free-trade theology stems from the theory of comparative advantage, laid out some 170 years ago by English economist David Riccardo. Riccardo argued that each nation has things it can make better and cheaper than other nations. Thus, it should sell what it makes best, and buy abroad things other nations make better. In this way, each nation uses its ``comparative advantage`` to its own profit.

Riccardo used the example of British textiles and Portuguese wine. Even then, this probably sounded better to the British than the Portuguese. The theories of free trade and comparative advantage have always been most popular in whatever country happened to be top dog in the trading world--as the U.S. has been since World War II.

The trouble is that ``comparative advantage``--the natural superiority of countries in certain lines of work--is meaningless today. The swift transfer of technology means that the most modern factories can be moved around the globe, to take advantage of the lowest wages. The communications revolution means that headquarters in Chicago can direct factories in Sri Lanka as easily as plants in Skokie.

In short, ``comparative advantage`` is no longer some natural, God-given blessing but can be created by any country willing to go to the trouble.

This, in fact, is the biggest cloud on the U.S. trade horizon. The American trade deficit with Europe will disappear when the dollar weakens. Even the record deficit with Japan can be brought under control when the administration realizes that Japan is more a menace to the American economy than a fair-weather friend in the cold war against the Soviet Union.

But the threat of low-wage competition will be with us for years. As China becomes a manufacturing nation, this threat can only grow. Moreover, there is nothing inherently unfair about this. No simple, single measures aimed at ``fair trade`` will work here. Only a full-fledged trade policy, based on world realities, will suffice.